I'm using a regression to look at the effect tax progressivity (how large the difference between the top and bottom marginal rate) has an GDP growth.

My thought was to use the US GDP to control for exogenous variables and have the regression be

State GDP = alpha + beta1*progressivity + beta2*usGDP

1. How do I determine whether or not to just use the GDP/GSP, log(GDP/GSP), or the actual rate of change? (GSP is gross state product, basically GDP of a state).

2. The data I have is annual and exists for all 50 states + DC. What sort of issues do I need to be looking for when running regressions with this sort of data?

I ran some regressions trying all three of those and wasn't finding the model to be very good. I decided to add in dummy variables for the 50 states and DC. Now I'm seeing a very high R^2 and flatness, GDP are statistically significant.

This image is the output from eviews, flatness what the progressivity variable was named. How does that look?

Its pretty big so I'm just linking to it instead of embedding it.

http://i.imgur.com/SO3Ko.png